It’s that time of year again. The summer seems a distant memory, you are pulling out your thick winter coat and gloves from the closet, and the nights are getting darker.
In one respect, it means we are reaching the end of the calendar year, and reaching a time before Christmas when many are on the hunt for presents for their family and friends. Sometimes, we even spot something we like so much, we treat ourselves!
With that in mind, I’ve been impressed recently when looking into Barclays (LSE: BARC), making it something I could easily treat myself into buying into before the year is out.
A couple of weeks ago, Barclays released results from the third quarter of 2019. It beat expectations in key metrics, delivering a profit before tax of £1.8bn, higher than analysts forecasts of £1.5bn. The other key metric that impressed me was the return on equity (ROE), which the firm said it is still on track to hit its target of 9%.
Think of the return on equity formula as the return on net assets. How much is the business able to squeeze out of it’s resources in order to generate profit? Obviously the higher the better, but it is all relative.
Some of the banks peers have ROE as low at 4.3%. Hopefully this can help to paint the picture that in the banking sector, Barclays is performing well.
A shift in direction?
The bank has stated that it is finding the UK retail market challenging this year. Due to Brexit concerns, consumers are cutting back on taking credit (be it mortgages or smaller loans).
The low interest rate environment we are in at the moment also does not aid the bank, as it is unable to make much of a spread between the rate it borrows at versus the rate it lends.
Yet the biggest surprise from Barclays’ Q3 results was the strong performance of the investment banking arm of the business. Most banks have struggled in recent years to generate decent returns from this area. I agree that one swallow does not make a summer, but if the investment bank can hold onto this performance into Q4 and beyond, this could really help the overall share price rally.
If focus is put back on the investment bank, it means it is less reliant on the consumer business, enabling overall performance to balance out should the market in the UK take longer to recover than anticipated.
What are the risks?
Good question. One of the main concerns I have is the PPI compensation. A few weeks ago I wrote about how Barclays (and other major UK banks) could finally put to bed the scandal and move on, as the deadline for submissions has now passed.
However, more recent news suggest the bank is still wading through two million claims. These have met the deadline, but have not yet analysed, therefore the pay out from PPI could continue into next year. This could potentially hurt profits for 2020 due to the provisions that need to be set aside.
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Jonathan Smith does not own Barclays shares. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019